Financial Development, Energy Consumption, and Environmental Quality: Testing the EKC Hypothesis in ASEAN Countries

Using the examples of five ASEAN countries, namely, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam, from 2000 to 2024, this paper has an empirical analysis on the interaction between the perfectly correlated variables of governance, financial development, economic growth, energy consumption, and environmental quality. Environmental quality, using carbon dioxide emissions per capita as a proxy, is investigated under the context of the Environmental Kuznets Curve (EKC) hypothesis, in order to determine whether increasing income level eventually generates better environmental performance. Panel econometric techniques such as fixed effect, random effect, and robust least squares estimation are applied to the analysis of non-linear dynamics and linear dynamics. The results show that financial development is positively correlated with carbon dioxide emissions, which suggests that in the absence of specific green finance tools, financial deepening boosts resource-intensive and polluting industries. Governance, however, does not show statistically significant or strong effects, which underscores the little use of institutional enforcement to reduce environmental degradation within the region. Evidence of the Kuznets curve for the environment is realized in the random effects model, where emissions are decreased by economic growth in the short run, then increased after reaching a certain threshold, while this relationship is not robust across all estimations. This is also the case with energy consumption, where the findings are mixed as energy structure types and various ASEAN economies' differential dependence on fossil fuels reflect the high level of heterogeneity in the region. Overall, the results indicate that financial development and governance can affect environmental quality, but they only do so by strengthening institutional structures and more properly regulating capital flows towards green technologies and renewable energy in terms of scale and direction. These results point to the need for understanding the challenge for ASEAN countries to integrate environmental goals into the context of economic and governance reforms to ensure that economic growth leads toward sustainable ecopolitical advancements.